Burgan Bank K.P.S.C. (BURG) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Ahmed El-Shazly from EFG Hermes, and I'd like to welcome you all to Burgan Bank's First Half 2026 Earnings Call. I will hand over the call now to Mr. Hamad Al Bader from Burgan Bank to kick off the call.

Thank you, Ahmed, very much. Good afternoon, everyone, and welcome to the Burgan Bank Group First Half of 2026 Earnings Call. Thank you very much for taking the time to attend this call. Joining from our side are Mr. Khalid Al Zouman, our Group Chief Financial Officer; Mr. Gaurav Handa, AGM within the Finance Group; Mr. Animesh Aseem, Executive Manager within the Strategic Solutions, Sustainability and IR; and myself, Hamad Al Bader within the Strategic Solutions, Sustainability and IR team. We will cover the key business and operating achievements, financial performance and the balance sheet developments, asset quality trends, liquidity and capital position as well as the performance of our subsidiaries. And following the presentation, as usual, we'll open the floor for questions. Slide 3 to 7 provides an overview of the group, including the franchise profile, subsidiaries and strategic priorities. Similar to our previous earnings calls, we will not be covering these slides today, and we will move directly to Slide #9, which highlights the key business and operating achievements. Despite the evolving operating environment, the bank continued to demonstrate the resilience and the strength of its franchise during H1 of 2026. The group delivered continued growth across its core business areas, supported by a diversified earnings profile, strong balance sheet momentum and disciplined execution of the strategic priorities. Total revenues grew by 9% year-on-year to KWD 138 million. This was supported by growth across both the interest and noninterest income streams. From a balance sheet perspective, the group maintained strong growth momentum. Total assets grew by 10% year-on-year, reaching KWD 9.6 billion. That was supported by a 10% expansion in the loan portfolio, which reached approximately the KWD 5.1 billion mark. Loan growth was primarily driven by our Kuwait operations, reflecting continued business momentum across key customer segments, while the international subsidiaries continue to provide diversification and additional growth opportunities. The deposit base also continued to expand, increasing by 5% year-on-year to the KWD 5.6 billion mark. This reflects the strength of the customer franchise and the diversified funding base. Our capital and liquidity position remained optimal with a capital adequacy ratio of 15.9%, NSFR of 110% and a comfortable loan-to-deposit ratio of 77%. During the period, we also continued to make progress across our strategic priorities, including strengthening asset quality, enhancing operational efficiency and investing in key capabilities that support our long-term growth strategy. Overall, the first half of 2026 reflects continued execution against our strategy of growing our core franchise, maintaining financial strength and creating sustainable value for our shareholders. With this overview, I'll now hand over to Gaurav to walk us through the financial performance in a bit more detail.

Thank you, Hamad. Good afternoon, everyone. Let us move to Slide #10, which provides further details on group's financial performance. In H1 '26, Burgan delivered solid top-line performance with revenue increasing by 9% year-on-year to KWD 138 million. This performance reflects the strength of our diversified earnings model with growth achieved across both net interest income and noninterest income streams. Net interest income increased to KWD 90 million, supported by continued expansion of our loan portfolio and other earning assets while maintaining a stable group NIM of 2.2%. The stability of our NIM despite changes in the interest rate environment reflects our ability to effectively manage our balance sheet and optimize funding cost. Noninterest income grew by 9% year-on-year to KWD 47 million, driven primarily by stronger fee generation and higher contribution from Group's diversified business lines. Operating profit stood at KWD 45 million compared to KWD 49 million in H1 '25. The slight decline was primarily driven by higher operating expenses, mainly reflecting the consolidation impact of UGB, continued investments in digital transformation and technological infrastructure and the impact of our operations in Turkey. These investments represent an important part of our long-term strategy to enhance operational capabilities, improve efficiency and strengthen our competitive position. The bank's cost of credit, net of recoveries, remained largely stable year-on-year at 70 basis points. While this remains above our long-term growth target level of 50 basis points, the level reflects our prudent and proactive approach towards provisioning as we continue to maintain a conservative risk management framework. IAS 29 monetary losses related to our Turkish operations due to an application of hyperinflation accounting increased to KWD 17 million in first half compared to KWD 10 million last year. Consequently, net profit attributable to shareholders stood at KWD 11 million in H1 '26 compared to KWD 21 million in H1 '25. Notably, excluding the IAS 29 impact, adjusted group net profit would have reached approximately KWD 19 million during first half '26. This demonstrates the resilience of our underlying earnings generation capacity and highlights the reported decline was largely driven by specific accounting and strategic factors rather than a deterioration in the core operating performance of the franchise. I will now move to Slide 12 to discuss our asset quality performance in more detail. Asset quality continued to strengthen during H1 '26, reflecting the successful execution of our proactive credit management strategy. As highlighted during our previous quarterly earnings calls, we were actively focused on resolving the elevated NPL situation. And during H1 '26, we successfully progressed in addressing these exposures. As a result, the group's NPL improved significantly to 2.3% compared with 3.2% in H1 '25, bringing our NPL level back to closer to 2% range, which represents a more normalized and acceptable level from our perspective. This improvement reflects the effectiveness of our risk management framework and our continued focus on maintaining a healthy and sustainable balance sheet. Further demonstrating the strength of our asset quality position, net NPL after collateral stood at KWD 30 million, equivalent to approximately 50 basis points. Our conservative approach is further supported by a strong coverage ratio of 240%. In addition, total expected credit loss provision buffer increased to KWD 109 million, providing a significant buffer against potential downside risk and reinforcing the Group's prudent provisioning approach. Overall, the improvement in asset quality, combined with strong coverage and provisioning level, provides confidence in the resilience of our balance sheet. With this, I will hand over to Animesh to walk us through the Group's liquidity profile, regulatory capital position and subsidiary performance.

Thank you, Gaurav, and good afternoon, everyone. Let's now move to Slide 13, which provides an overview of Group's liquidity profile. The Group continues to maintain a strong and resilient liquidity position, supported by a diversified funding base and a prudent balance sheet management. The deposit base stood at approximately KWD 5.6 billion, representing a 5% year-over-year increase, primarily driven by continued growth in our Kuwait franchise, supported by contributions from our international subsidiaries. The deposit mix remained broadly stable with CASA balances representing approximately 28% of our total deposits, reflecting the strength of our customer relationship and diversified funding structure. Burgan's loan-to-deposit ratio stands at 77%, well below the 100% regulatory ceiling, highlighting our disciplined approach towards liquidity management and maintaining appropriate funding buffers. The group's liquidity position remained robust with an LCR of 197% and NSFR of 110%, both comfortably above the CBK's minimum requirements. These strong liquidity metrics reflect the strength of our funding profile, prudent asset-liability management framework and our continued focus on maintaining financial flexibility to support future growth opportunities. Let's now move to Slide 14, which covers the group's regulatory capital position. Burgan continues to maintain optimal capital structure, providing a solid foundation to support growth while maintaining prudent financial discipline. The group's CET1 ratio stands at 10.5%, while the capital adequacy ratio reached 15.9%, comfortably above the minimum regulatory requirement introduced by the CBK in March '26 as part of its financial stimulus measures. As part of our ongoing capital management strategy, the bank is progressing with a rights issue of up to KWD 50 million to further strengthen its capital base and enhance growth capacity. The rights issue has received the necessary approvals from Central Bank of Kuwait and Capital Markets Authority, and the bank is currently completing the remaining regulatory and procedural requirements with issuance expected to proceed shortly. Upon completion, the capital increase will further enhance our capital flexibility and support sustainable growth opportunities while maintaining strong regulatory buffers. Let's now proceed to Slide 15 for an overview of our subsidiary performance. Starting with our Kuwait operations, which continues to represent the core foundation of the group, accounting for approximately 71% of total assets. The Kuwait franchise continued to deliver positive momentum, supported by healthy business activity and improving operating metrics. Net interest margin improved by 10 basis points to 1.2%, reflecting effective balance sheet management, while cost of credit improved to 10 basis points. Asset quality strengthened with NPL ratio improving to 2.2% compared to 3.2% in H1 '25, reflecting continued progress in portfolio quality and resolution efforts. Moving to our international operations, starting with Burgan Bank Turkey. BBT continues to operate in a challenging macroeconomic environment, including elevated inflationary pressures and ongoing market volatility. Despite these challenges, the franchise continues to demonstrate resilience and remains an important contributor to group's diversification strategy. Representing approximately 14% of group's asset, BBT delivered stable operating performance with NIMs at 5.7% and cross-sell ratio of approximately 24%. Asset quality remains strong with NPL ratio of 60 basis points, while cost of credit at approximately 70 basis points, reflecting disciplined risk management. Turning to our Algeria operations. Algeria Gulf Bank continues to deliver a positive contribution to the group, representing approximately 10% of total assets. The business remained healthy has maintained healthy operating performance with NIMs of 5.2%, supported by a cross-sell ratio of 31%. The franchise continues to benefit from its strong customer relationship and diversified product offerings. Moving to UGB. UGB continues to operate primarily as an investment-focused platform at this stage with limited client lending activity. Accordingly, traditional credit metrics are not yet representative of the business model. The platform continues to maintain healthy cross-selling activity with a cross-sell ratio of 110%, supported primarily by contributions from KAMCO. Finally, our Tunisia operations, which represents approximately 2% of group's assets, continued to operate steadily during the period with stable performance indicator and no significant developments during the first half of '26. Overall, our subsidiaries continue to provide a meaningful diversification to the group, while each market continues to focus on strengthening profitability, operational efficiency and long-term franchise value. With that, I will hand it back to Hamad for the closing remarks.

Thanks, Animesh, and thank you all. As we conclude the presentation, let's move on to Slide #17. Burgan delivered resilient performance during the first half of 2026. This was underpinned by sustained revenue growth, a robust well-capitalized balance sheet, continued improvement in asset quality and disciplined capital and liquidity management. Our diversified business model continues to demonstrate its strength and resilience. This was driven by a solid momentum across Kuwait operations and supported by meaningful contributions from our subsidiaries, reinforcing resilience and sustainability of our earnings profile. The improvement in asset quality reflects the effectiveness of our proactive risk management approach and our continued focus on maintaining a healthy and sustainable balance sheet. At the same time, our optimal capital and liquidity positions provide us with the flexibility to support future growth opportunities while maintaining prudent financial discipline. And as part of our proactive capital management strategy, we are progressing with a rights issue of up to KWD 50 million, which has received the necessary approvals from CBK and the Capital Markets Authority. Upon completion, the transaction will further strengthen our capital position and enhance our capacity to support sustainable growth opportunities. We remain committed to investing in our strategic priorities with continued capital allocation towards digital transformation, operational excellence and talent development, ensuring that the bank remains well positioned to deliver sustainable growth and long-term shareholder value. And finally, our continued inclusion in the FTSE4Good Index Series and an A rating from the local Mnakh Sustainability Index reflects the bank's ongoing commitment to ESG excellence. We continue to embed ESG principles across our governance framework, risk management processes and business operations to support long-term value creation. Before moving to the Q&A, again, I would remind you all that we have a dedicated IR app available in both the iOS and Android platforms. And this will provide everyone with convenient and real-time access to our financial disclosures, announcements, investor materials and performance updates and all is linked to the local stock exchange with live updates. We encourage investors to use the application as an additional channel for accessing all of the investor information regarding Burgan and all of the engagement materials. I think with that, we can conclude the presentation, handing it over to Ahmed to facilitate the Q&A session.

Thank you for the presentation. We will now open the floor for questions. [Operator Instructions] So we received a few questions in the chat. So I'll start with the first one. What is the driver behind the significant margin expansion in Q2 sequentially? And what's the outlook for NIM for the second half?

Yes, sure. So the reason for increase in our NIMs in Q2 specifically was due to recovery of interest income that was previously suspended on certain accounts. You would have also seen a consistent recovery in our asset quality metrics. In addition, we observed a modest easing in our cost of funds compared to first quarter of 2026, which also supported the margins. On the other side, Turkey continues to be a headwind to group NIMs. Compared to last year, margins in Turkey were lower primarily due to repricing of loans at lower interest rates, while deposit costs have remained elevated. Overall, looking ahead, we expect NIMs at group level to be broadly in the range of 2. -- 2% to 2.2% for full year 2026. While the pace of Q2 improvement may not be repeated, we believe the underlying margin profile remains stable and supports our expectation of around 2% to 2.2% group NIMs for the full year.

Thank you. So I'll take the next question. Can you please give us your outlook on the KPIs?

Yes. So on the NIMs, as we just highlighted, it is -- we expect around 2% to 2.2%. On the OpEx, if you see on the face of our P&L, you would notice the expenses have increased at around 20% year-on-year. However, there is a change in the consolidation scope. UGB last year was consolidated only for 3 months, whereas this year has been consolidated for 6 months. For like-to-like comparison, you would -- it's better to look at the Q2 growth in expenses, which is around 6% year-on-year. That is what a normal range that we would expect. In terms of cost-to-income ratio, we expect it to be in the mid-60s for 2026 due to investment in our new core banking and the inflation-adjusted increase in Turkish operations. In terms of cost of credit, the increase was very modest in the first half of 2026, mainly due to a significant recovery that we had in -- during the quarter. The management decided to take precautionary provisions against the recoveries. If you look at the net cost of credit for Kuwait operations, specifically on Slide 15, the net cost of credit was only 0.2%. The subsidiaries reported a modest increase in cost of credit, mainly driven by Algeria and Turkey, but it's broadly in line with the risk environment in those markets. So despite the higher reported cost of credit in first half, we continue to maintain our full-year guidance of 50 to 60 basis points, supported by ongoing recoveries and prudent risk management practices.

Thank you very much. So next question is, could you give color on whether or not you will call the USD Tier 2?

Sure. Thank you for the question. The Tier 2 call window is starting from 15th September up until 15th December. However, as you know, due to the regulatory constraints, we are not in a position to comment on any potential action which the bank is going to take or to provide any forward-looking guidance in this regard. We would maintain a transparent communication with the investors, and we will make the relevant announcements through the appropriate disclosure channel as and when the decision is taken on this matter.